Trade in Value‐Added and the Welfare Gains of International Fragmentation

ABSTRACT This study examines the overall impact of international production fragmentation on the welfare gains from trade. Using a novel model that accounts for shifts in preferences between local and foreign goods and distinguishes between intermediate and final goods trade, we gain a more nuanced understanding of how fragmentation shapes these welfare gains. Our findings challenge earlier estimates, showing that international fragmentation contributes around 20% to trade‐related welfare gains, a significantly smaller impact than previously believed. This result highlights the importance of considering changing consumer preferences, which can reduce the projected advantages of global supply chain integration.